Besides concerns on inflation and increase in interest rates, freeing up of the savings rate has been affecting banks’ profitability, believe analysts
Stocks of the country’s top banks declined between one and 2.5 per cent on Thursday. While higher oil prices and interest rate increases have been among key concerns weighing on banking stocks in the recent past, markets are also worried about the potential impact of deregulation of savings rate (on banks’ financials), whenever the move is announced.
Meanwhile, analysts estimate that the loan growth of these top banks should remain healthy at 16-20 per cent and asset quality should remain steady in 2011-12, albeit lower when compared to the current financial year. Among them, for the PSU majors, measures to recapitalise (infuse capital) should be positive, providing them fuel to fund future growth.
| LOAN GROWTH, VALUATIONS | ||||
| LOAN GROWTH (%) | Price/Bk value (x) | |||
| FY11E | FY12E | FY11E | FY12E | |
| ICICI Bank | 20.0 | 16.0 | 2.1 | 1.9 |
| HDFC Bank | 30.0 | 27.0 | 4.0 | 3.4 |
| SBI | 17.0 | 16.0 | 1.9 | 1.6 |
| BoB | 24.0 | 17.0 | 1.9 | 1.6 |
| PNB | 24.0 | 16.0 | 1.7 | 1.4 |
| E: Estimates Source: Morgan Stanley, Macquarie Research | ||||
| IMPACT ANALYSIS | |||||
| % | CASA Ratio | NIM impact | FY12E EPS impact | ||
| Case I | Case II | Case I | Case II | ||
| ICICI Bank | 44 | 0.30 | 0.59 | -8 | -16 |
| HDFC Bank | 51 | 0.32 | 0.64 | -9 | -17 |
| SBI | 48 | 0.38 | 0.77 | -18 | -36 |
| BoB | 35 | 0.28 | 0.56 | -11 | -21 |
| PNB | 39 | 0.31 | 0.62 | -13 | -26 |
| Note: Case I is assuming savings rate of 4.5% and case II 5.5% Source:Macquarie Research E: Estimated | |||||
“In the near term, banking stocks will remain under pressure. Savings account rate deregulation is a negative for high-Casa banks. On a one-year period, however, performance should improve,” said Quantam Securities Research Analyst (Banking) Rati Pandit.
Here is a quick estimate of the potential impact of savings rate deregulation on top banks in the public and private sector, and their future prospects.
Squeezed margins
While RBI is planning to allow banks to fix interest rates on savings accounts, foreign brokerage house Macquarie Research, in a report dated March 7, has highlighted that this move could likely squeeze the banks’ net interest margins (NIMs), if implemented (see table). This will be primarily driven by higher competition, as newer banks and those with poor deposit franchises would likely try to lure customers by offering higher interest rates. Macquarie expects NIMs to come down 25-30 basis points for every 100 basis points increase in the savings rate. One percentage point is equal to 100 basis points.
As against private players, who derive a large chunk of their income from fee-based activities, public sector banks are still highly dependent on interest income for overall topline growth. This means the impact of savings rate deregulation on earnings (EPS) is likely to be relatively high for the large public sector banks (PSBs) (around 13 per cent for every 100 basis point increase in savings rate) than on private players (8 per cent). Among PSBs, SBI is likely to be affected the most due to its very high savings deposit proportion of 38 per cent, followed by Punjab National Bank (PNB) at 31 per cent.
While the deregulation will result in more product innovation, banks could also look at fixing certain charges in an attempt to protect their NIMs, besides looking at ways to improve efficiency. In the longer term, however, the services offered by banks along with accessibility (and safety perception by account holders), would play an important role in attracting savings deposits rather than just higher returns.
Business growth
Meanwhile, banking analysts expect these top-five banks to report a growth of 16-20 per cent in their respective loan books in 2011-12, aided by 8-9 per cent growth in GDP. This should help them post healthy growth rates in net interest income next year.
For PNB and Bank of Baroda (BoB), the Government of India’s steps to infuse about Rs 3,500 crore in 2011-12 will boost the Tier-I capital adequacy (an indicator of a bank’s financial strength) to above 8 per cent and also increase its stake to 58 per cent, which will boost their lending capacity significantly. Further, this move will enable banks to raise more capital from the market, as well as from foreign investors for some banks. BoB and PNB have 19 per cent FII investments, very close to the government’s cap of 20 per cent.
SBI, which is planning a rights issue to raise up to Rs 20,000 crore, could get a higher capital infusion as the government is contemplating a Tier-I capital adequacy ratio of 9-9.5 per cent, against 8 per cent for other PSBs. The move will enable SBI to retain its number-one position as well as give it access to capital at a lower cost.
Outlook
Banking stocks, which had outperformed markets in the current financial year till November, have underperformed thereafter due to concerns over inflation and interest rate incresae. With most of the bad news factored in, analysts are largely neutral in the near term.
Pending any development on the savings rate deregulation front, ICICI Bank, HDFC Bank and SBI remain top picks of most brokerages. While analysts say BoB’s sound asset quality is a major positive, PNB and SBI should be able to sustain NIMs at around 4 per cent on account of their strong low-cost deposit base. As credit cost moderates in 2011-12, SBI’s reported EPS growth should be strong.
HDFC Bank’s retail loan growth is picking up and will allow it to maintain strong revenue progression. The bank has virtually negligible restructured loan balance, implying greater visibility on asset quality. ICICI Bank’s falling non-performing assets is a positive, but growth in loans needs to be watched.
